Beyond LCOE – Economic performance of renewable auctions

Abstract

This study analyses how different types of remuneration schemes in renewable auctions can lead to economically efficient or inefficient outcomes in technology-specific and multi-technology settings. The main metric in this assessment is the Extended Support Need (ESN) indicator – defined as the balance between social costs and benefits of variable renewable energy source (vRES) technologies – incorporating not only the costs of vRES development through their LCOE values but also their market benefits for society measured by the market value of these technologies. Depending on the level of the ESN and the technology set-up, the analysed three remuneration schemes (one-sided, two-sided or fixed premium scheme) perform very differently from an economic efficiency point of view. In the negative ESN range (meaning technologies require support) fixed premium schemes are the most advantageous, but in case of positive ESNs two-sided schemes may outperform the others. However, sliding premium systems may present technology selection bias in a multi-technology setup applied in many EU countries, meaning that suboptimal technology is selected in the auction. The findings show that fixed premium schemes should be the preferred option if adjusted to accommodate positive ESN projects by introducing the option of negative bids.